Which approach best supports effective budgeting?

Using accurate records of past performance is the best approach to effective budgeting because it provides a solid foundation for making informed financial decisions. Historical data helps identify trends, patterns, and variances that can be crucial for projecting future income and expenses. By analyzing past performance, a business can understand its financial strengths and weaknesses, allowing for more realistic budgeting that reflects actual operational costs and revenue potential. This data-driven approach minimizes guesswork, enhances forecast accuracy, and promotes more strategic financial planning.

Other approaches, like ignoring past financial records or relying solely on predictions, can lead to unrealistic budgeting that may not account for real-world challenges or opportunities. While considering personal expenses of the owner might provide additional context, it may not be directly relevant to business budgeting and could complicate the financial picture. Therefore, leveraging accurate historical records ensures a more effective and grounded budgeting process.